U.S. job growth moderated in August from a torrid pace the previous month, but hiring remained solid despite growing headwinds from higher interest rates, scorching-hot inflation and mounting recession fears.
Employers added 315,000 jobs in August, the Labor Department said in its monthly payroll report released Friday, in line with the 300,000 jobs forecast by Refinitiv economists. That marks the lowest monthly gain since April 2021 and is a major decline from the 526,000 jump recorded in July.
The unemployment rate, meanwhile, unexpectedly ticked up to a six-month high of 3.7% as the labor force participation rate increased.
Wages also continued to rise, but came in lower than forecasts. Average hourly earnings increased 0.3% for the month and 5.2% from the previous year, slightly below the respective 0.4% and 5.3% estimates from Refintiv.
Markets responded positively to the news, trimming their losses for the week. The Dow jumped more than 100 points on Friday morning.
"The labor market is moving in the right direction for policymakers," said Jeffrey Roach, chief economist at LPL Financial. "An uptick in unemployment along with a modest increase in the participation rate means that the labor market in August is less tight than it was in July."
Job gains were broad-based in August, with professional and business services leading the way in hiring, adding 68,000 new workers. That was followed by health care (48,000), retail trade (44,000) and manufacturing (22,000). Employment in financial activities climbed by 17,000.
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While monthly jobs data is always important, the Federal Reserve is closely watching this particular report for signs the labor market is starting to slow down from its frenzied pace as policymakers try to wrestle inflation, which is still running near a 40-year high, back to 2%.
"The report doesn’t change the hand for the Fed as a 75 basis point hike is still on the table for the September meeting," said Charlie Ripley, senior investment strategist at Allianz Investment Management. "The upcoming CPI report is likely to determine how aggressive the Fed will need to be in the near term and if the string on strong economic data continues, it would not be surprising to see a 4.0% Fed funds rate by the end of the year."
Fed Chairman Jerome Powell spooked the market last week with his keynote speech in Jackson Hole, Wyoming, during which he renewed the specter of an increasingly hawkish Fed that is determined to fight inflation, regardless of the potential economic fallout.
"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
That sentiment was echoed by other Fed officials this week, with New York Fed President John Williams warning that interest rates will likely remain elevated for some time. Cleveland Fed President Loretta Mester, meanwhile, signaled that she expects the benchmark rate to rise above 4% by early next year and dashed Wall Street's hopes for a rate cut in 2023.
"My current view is that it will be necessary to move the fed funds rate up to somewhat above 4% by early next year and hold it there," Mester said Wednesday in remarks prepared for an event organized by the Dayton Area Chamber of Commerce. "I do not anticipate the Fed cutting the fed funds rate target next year."
For months, the labor market has remained one of the few bright spots in the economy, with the economy adding more than 2 million jobs over the first half of the year. Additionally, earlier this week, the government reported that job openings climbed past 11.2 million — meaning there are roughly two available jobs per worker.
But there are signs that the labor market is starting to weaken, with a plethora of companies, including Alphabet's Google, Walmart, Apple, Meta and Microsoft, announcing hiring freezes or layoffs in recent weeks.
On top of that, data on Wednesday from payroll processing firm ADP signaled that hiring cooled in August, with private companies adding just 132,000 new jobs, the lowest since May.
The Labor Department also lowered the June payrolls count to 293,000 from 398,000, and reduced July's to 526,000 from 528,000 – a combined drop of 107,000 from earlier estimates.